Equity Incentive?the Separation Of Control Rights And Cash Flow Rights And Implied Cost Of Capital

How will the implementation of equity incentive affect company value? Domestic and foreign scholars have never reached an agreement on this issue.Jensen and Meckling(1976)proposed Convergence of Interest Hypothesis.They believed that equity incentive linked the interests of the shareholders and the managers to ease the interest conflicts.On the other hand,Fama and Jensen(1983)proposed Managerial Entrenchment Hypothesis.They believed that when managers own a high proportion of equity,they do not necessarily maximize the value of the company.This is because when managers hold a significant proportion of the company's shares,they gain enough influence and voting rights to become more powerful and pursue maximization of their own interests,but not maximization of company value.Most existing researches focused on the relationship between equity incentive and business performance,while ignoring the contribution of implied cost of capital to company value.Based on this,the main idea of this paper is to explore whether the equity incentive will ease the�principal-agent problem�,reducing the implied cost of capital and increasing the company value as a result.In addition,the western traditional principal-agent theory is actually based on the theory of single principal-agent,while the majority of listed Chinese companies have comparatively concentrated ownership structure.There exist not only agency problem between shareholders and managers,but also agency problem between the controlling shareholders and the minority shareholders.Therefore,this paper proposes the theory of double principal-agent.Using the panal data of Chinese listed companies from 2008 to 2016,this paper explore the impact of equity incentive on the two types of agency costs and the implied cost of capital.Taking into account the different agency problems between different controlling shareholders,the sample will be divided into state-owned enterprises and private enterprises.Finally,we draw the following conclusions: First,there is a significant negative correlation between the equity incentive and the implied cost of capital.Compared with private enterprises,the implementation of equity incentive is more effective in declining the implied cost of capital of the state-owned enterprises.Second,the relationship between equity incentive and the two kinds of agency costs is inconsistent with the original hypothesis of the article.The implementation of the equity incentive will aggravate the first type of agency problem,indicating that equity incentive can not alleviate the principal-agent problem between shareholders and managers.However,the significant negative correlation between equity incentive and the second type of agency costs shows that equity incentive can effectively alleviate the principal-agent problem between the controlling shareholders and the minority shareholders.Thirdly,there is a significant positive correlation between the two types of agency costs and implied cost of capital,indicating that the alleviation of two types of agency problems can reduce the implied cost of capital.